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Strategic Sourcing Takes Vigilance

If you're like most manufacturers, you've spent the past few years consolidating suppliers, reducing the inventory you carry, and sourcing goods from low-labor-cost countries. These tactics have meant survival in many vertical sectors where manufacturers must drastically cut costs to remain competitive.


But global sourcing has caused troubles, especially in the consumer packaged goods industry, where quality problems and corporate social responsibility issues threaten to destroy overnight brands built up over decades. The problem for most manufacturers is that they can't pull back their purchasing from overseas to reduce risk. With threats looming large over today's increasingly fragmented supply chains, manufacturers must turn to processes, organizational behavior, and technology tools to help mitigate risk.


"The dilemma is all of those things [manufacturers] pursued to reduce cost are largely irreversible," says Jim Lawton, vice president and general manager of Dun & Bradstreet's Supply Management Solutions division. "You can't bring all of your spend back to the U.S., and you can't stock up on inventory. [Manufacturers] don't have the resources to deal with the new risks created by overseas sourcing. They need help identifying the right suppliers and discovering as early as possible where the problems will be."


There are several strategies for reducing purchasing and sourcing risk. The safest approach is a combination of software tools and business processes aimed at continuously monitoring the supply base, along with an overall strategy to reduce risk. Better managing your supply base will pay dividends by giving you a little extra time to cope with problems or potential problems as they crop up.


"If I have time, I can choose a second source, do an intervention, add some inventory, send a team over to do outbound quality management," Lawton says. "But I can't do that if I don't know where the problems are."


Advance Warning System


Potential solutions to the problem of global sourcing management come from several different avenues. For example, D&B's DNBi Supply Management is a hosted Web-based application that interacts with a manufacturer's ERP system to track current suppliers while also helping to narrow the universe of potential new suppliers. D&B has years of expertise in tracking companies' financial performance; this offering aggregates that type of data along with information from other customers to provide early warning of problems.


DNBi Supply Management sheds light on who exactly you're dealing with — something that should be straightforward but often is not when it comes to global sourcing. It also shows who your suppliers' suppliers are, which is increasingly important, according to Lawton. "Nowadays a lot of the value in your supply chain is not only in your four walls and tier 1 suppliers, but also tier 2, 3, 4 companies that you may not even be buying from." Not knowing the identity of companies further down the chain does not shield you from risk.


"We have developed an understanding of the financial performance and quality and delivery performance of suppliers around the world," Lawton says. "We have predictive analytics. We have found that suppliers will start to have delivery issues long before they have quality issues, so delivery issues are often a sign that something bigger is afoot."


On the other hand, tracking only your suppliers' history of on-time delivery is risky in itself, says Betsy Burgess, director of marketing for Centric Software, which offers a strategic sourcing product for companies in the fast-moving consumer goods sector. Most manufacturers, retailers, and wholesalers in this arena track their suppliers' on-time delivery performance, but nothing more.

"If you don't know how many factories your supplier has or who their suppliers are, if something goes wrong, the entire product line is at risk, and that can impact your revenue," Burgess says.


Another key metric is code of conduct status: whether the supplier is compliant with child labor laws. A manufacturer's brand image and reputation are at stake if its suppliers fail to follow these laws.


Centric's software, announced in June 2007, falls under the heading of "product intelligence," according to Burgess, and represents a broadening of the product lifecycle management (PLM) category. Traditional PLM focuses on pure design data relative to a bill of materials (BoM). Centric's market "sweet spot" is consumer goods companies that deal in soft goods and apparel, for example. "These goods are low-cost, high-margin, and high-volume. These companies have very different needs for PLM. They still want to track the product specification and all the information about whether they will get a product to market on time, but the approach is different from traditional PLM," Burgess says.



Factoring in Risk


Centric Strategic Sourcing helps customers manage the selection of products from the earliest concept, to tracking the SKUs, to determining the cost of landed goods with all the financial variables. Most companies in this market segment have been getting by with a mix of homegrown applications, spreadsheets, and e-mail — the hodgepodge of stuff that still keeps most businesses running. One problem with these office stalwarts is they don't allow companies to add the dimension of risk to their sourcing decisions. "To do risk mitigation, you'll need to invest in a tool," Burgess says.


Or, if you're already using a software suite, you might be able to use a strategic sourcing add-in. i2, for example, offers i2 Total Supply Management as part of its supply chain management suite of applications. The company serves manufacturers chiefly in the CPG, automotive, and high-tech industries. High tech, in particular, has been focused on sourcing and procurement risks for many years, says Harish Iyer, senior director of supply management solutions for i2 (see sidebar).


"We enable you to monitor a host of metrics relating to supplier quality to do supplier scorecarding. You can tie that into supplier analysis, which can be used to do supply base rationalization," Iyer says.


With the fragmenting forces of globalization, the nature of the strategic sourcing problem is changing, according to Iyer. "Your suppliers used to be in your backyard. You did not have to worry about anything other than just the price per piece. Now you have to monitor quality, take logistics costs into account, worry about political unrest. Supply chain risk comes in different forms today," he says.


However, it's not necessary to buy a full-featured platform to get a better handle on reducing sourcing risk. A host of lightweight e-procurement solutions — many offered in an on-demand, hosted model — offer relief from the tangle of e-mail, phones, and faxes without breaking the bank.


"The first part of any strategic sourcing effort is simply understanding the supply base that is out there," says Matt Miller, president of K2 Sourcing, an e-procurement software vendor. With K2 Sourcing, users can create an electronic request for information that will help them quickly winnow the pack of potential suppliers using weighted responses in a matrix. The company's eRFI tools, available for a free trial, help pin down exactly whom you're dealing with — a supplier, its agent, or, worst, a trading intermediary — so manufacturers can make more informed sourcing decisions.

Of course, none of these products eliminates the need to look a supplier in the eye and visit its plants. No matter what industry you're in, if you're going to source a significant quantity of goods overseas, sooner or later you will have to visit. Dealing in person with an important supplier is a key element of risk reduction.


Most procurement organizations are just beginning to evaluate and mitigate sourcing risks, Lawton of D&B says. "Risk is new for them, but they are learning in a hurry."

Source:  Editorial from the February 2008 issue of Managing Automation,

Strategic Sourcing Takes Vigilance, by Lauren Gibbons Paul, Contributing Editor

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